A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars—meaning you don’t get a tax deduction when you contribute, but you never pay taxes on qualified withdrawals.

Key benefits:

• Tax-free growth on all investment earnings
• Tax-free qualified withdrawals in retirement
• No Required Minimum Distributions (RMDs) during your lifetime
• Contributions (not earnings) can be withdrawn anytime without penalty
• Can be passed to heirs with continued tax-free growth

For 2025, the Roth IRA contribution limits are:

• Under age 50: $7,000 per year
• Age 50 and older: $8,000 per year ($7,000 + $1,000 catch-up contribution)

These limits apply to your total IRA contributions (both traditional and Roth combined). The deadline to make contributions for a tax year is typically April 15 of the following year.

Looking ahead to 2026: The limit increases to $7,500 (under 50) and $8,600 (50+).

Your ability to contribute to a Roth IRA depends on your Modified Adjusted Gross Income (MAGI). Here are the 2025 income limits:

If your income falls within the phase-out range, you can make a partial contribution. If you exceed these limits, consider a “backdoor Roth IRA” strategy (contribute to a traditional IRA, then convert to Roth).

The calculator uses the compound interest formula with the following assumptions:

• Contributions made at the start of each year – Your annual contribution is added first, then grows for the full year
• Annual compounding – Returns are calculated and reinvested once per year
• Consistent rate of return – The same return rate applies each year (actual returns will vary)

For Roth IRA: Future Value = (Previous Balance + Contribution) × (1 + Return Rate)

For Taxable Account: The calculation accounts for taxes on investment gains each year, reducing the effective growth rate.

Yes, but with some rules:

• Contributions: You can withdraw your original contributions at any time, tax-free and penalty-free (since you already paid taxes on that money)
• Earnings: Withdrawing earnings before age 59½ may incur a 10% penalty plus income tax, unless you qualify for an exception

Penalty-free exceptions for earnings include:

• First-time home purchase (up to $10,000 lifetime)
• Qualified education expenses
• Disability or death
• Unreimbursed medical expenses exceeding 7.5% of AGI
• Health insurance premiums while unemployed

For fully tax-free and penalty-free withdrawals of earnings, you must be 59½ AND have held the account for at least 5 years.

Key differences:

• Tax Treatment: 401(k) contributions are pre-tax (reduces taxable income now, taxed at withdrawal). Roth IRA contributions are after-tax (no deduction now, tax-free at withdrawal).
• Contribution Limits (2025): 401(k) allows up to $23,500 ($31,000 if 50+), while Roth IRA allows only $7,000 ($8,000 if 50+).
• Employer Match: 401(k)s often include employer matching – free money! Roth IRAs don’t have this benefit.
• RMDs: 401(k)s require minimum distributions at age 73. Roth IRAs have no RMDs during your lifetime.
• Investment Options: Roth IRAs typically offer more investment choices than employer 401(k) plans.

Best strategy: Contribute enough to your 401(k) to get the full employer match, then max out your Roth IRA, then contribute more to your 401(k) if you can.

Roth IRAs can hold a wide variety of investments:

• Stocks – Individual company shares
• Bonds – Government and corporate bonds
• Mutual Funds – Professionally managed portfolios
• ETFs – Exchange-traded funds (often lower fees than mutual funds)
• Index Funds – Track market indexes like S&P 500
• Target-Date Funds – Automatically adjust allocation as you age
• REITs – Real estate investment trusts
• CDs – Certificates of deposit

Prohibited investments: Life insurance, collectibles (art, antiques, gems, coins), and S corporation stock.

Unlike traditional IRAs and 401(k)s, Roth IRAs have no Required Minimum Distributions (RMDs) during your lifetime. This means:

• You’re not forced to withdraw at any age
• Your money can continue growing tax-free indefinitely
• You have complete flexibility on when and how much to withdraw
• It’s an excellent vehicle for leaving tax-free money to heirs

For beneficiaries: After the original owner’s death, most non-spouse beneficiaries must withdraw all funds within 10 years (per the SECURE Act), but distributions remain tax-free. Spouse beneficiaries can treat the inherited Roth IRA as their own.